Rowing with a shovel: how banks make billions during the war

“In the first two months of this year alone, Ukraine’s banking system earned UAH 21.5 billion, which is 33% of the net income margin. This margin is double the peaceful 2018 and a record since the Global Financial 2008 Crisis. This is It is the history of how you can achieve a record profit with the hryvnia and the economy going to extremes”. Idea.

NBU prints 400 billion UAH for officials:

  • new “cash” more than 400 billion UAH appears in banks,
  • NBU pays banks 200+ million UAH per day for this “cash” or 9+ million UAH per hour of the day.

All six dozen banks agree.

Part One. A pleasant problem for banks in Ukraine

In the first two months of this year, the banking system earned UAH 21.5 billion, which is 33% of the net income margin. Double the peaceful 2018 and the highest (2020 level) margin since the 2008 Global Financial Crisis.

Banks’ revenue increased by 33% year-on-year to UAH 66 billion.

Banks’ expenses increased by 12% year-on-year, reaching UAH 44 billion.

As a result, at the end of the year, we can expect news of incredible bonuses, especially for state-owned bank managers: “For great achievements in a difficult time for the country.”

How come the war is a war and the snow continues as planned?

part two. The source of the problem came from the easy solutions

War is expensive and raising taxes is a long-term solution. And when the economy really stops, there is no one to buy them. Therefore, with the outbreak of war, the NBU began to actively print money for the government’s budget (government is not state, state is not government, let’s separate it).

Nothing special, during the war every government takes the tax on inflation – it prints new money, buys various goods with it, and over time the prices of everything rise due to the increase in the money supply. As a result, the purchasing power of the citizens’ money decreases. It seems that no taxes were paid, but we all got poorer.

Well, for this purpose, the NBU printed 390 billion UAH (remember this figure) last year and gave it to the authorities, increasing its portfolio of government bonds by 2.3 times! That’s why international support is so important, and that’s why the IMF demands that the NBU stop printing money, because otherwise the 26% inflation will look like a flower.

The authorities then gradually funneled that money into the economy through welfare payments and payments to military personnel. The military doesn’t have time to think about shopping, and in general, consumer sentiment isn’t at its best during the war. As a result, too much money sits dormant in banks. It is difficult to attract them abroad, but it is scary to spend them on consumption or investment in Ukraine, even to deposit them (with such inflation and uncertainty).

Third part. Your money is already swelling

After all these decisions, we have a huge liquidity in the banking system, only the money lying in the “current accounts” – 500 billion UAH. For comparison: the average volume in 2021 was UAH 90 billion (these are UAH 390 billion printed by the NBU).

That is, every 5 hryvnia, or 20% of the banks’ net assets, is actually a “cash” that can rush into the economy at any time:

  • increase inflation
  • enter the foreign exchange market (businesses should know what to expect from the exchange rate);
  • combine with government bonds and “fill up” interest rates.

Where, under what conditions and with what consequences is unknown – perhaps citizens and businesses will begin to open large long-term deposits or spend their funds.

In order to somehow control this situation, the NBU decides to link this money to their accounts and gives banks the opportunity to deposit these funds into their “one-day deposits”.

So, on average, every day in the last quarter of 2022 the NBU pulled 340 billion UAH. This year already 370 billion UAH (almost as much as the NBU prints – 390 billion UAH). The Central Bank pays these deposits 20% annually (9% – until June 2022 and 23% – until April 7 of this year).

Since April 2022, when this process began to develop, banks have earned UAH 27 billion from overnight deposits in the NBU, or more than the annual profit of the banking system for the whole of 2022. This year, for 2 months, banks have already earned UAH 13 billion from this, which is 61% of all banks’ revenues. Without deposits in the NBU, the margin of the banking system would not have been a record 33%, but a more familiar 13%.

what to do with it

There are many questions: “Where is everything going?” and “Why again at the expense of the citizens?”

one. In the first two months of 2023, banks earned UAH 21.5 billion. In the usual 2018 and 2019, the first two months provided 25% of the annual profit. It turns out that banks can get 86 billion UAH this year? Sounds logical?

Citizens who carry and will bear the inflation burden of printed hryvnias cannot receive sufficient interest on deposits. So why would banks make excessive profits as a result of excessive liquidity? After all, it is precisely for this reason that citizens do not have reasonable deposit rates.

2. But banks will say that they are diverting these revenues to reserves.

As the NBU points out, a third of loans to businesses and citizens may become non-performing – this is UAH 200 billion. Therefore, banks allocated UAH 120 billion in reserves last year, and now they have reserves of UAH 360 billion.

Is it fair for everyone to bear the brunt of inflation, but won’t those who lose their homes or have their jobs physically destroyed have to bear the brunt of the loans on destroyed assets? – Yes.

It is fair for banks to write off such loans using profits from excess liquidity.

But the situation has changed.

If in February-October 2022 banks sent more funds to the reserves than was left as a result of profit, then in the last 2 months of last year the situation is the opposite. In the same year, the banks, which made a record profit of 21.5 billion UAH in two months, sent UAH 2.5 billion to the reserves (29 million UAH in February is absurd, perhaps the government bonds, which can be considered reserves).

If there are already enough reserves, then again – why should banks take special advantage of excess liquidity, since only citizens will pay for the printing of hryvnia?

3. The NBU is trying to solve this problem and regain control over rates in the economy.

  • It raises the reserve ratio for current funds (the part that should be set aside and untouched).
  • It now encourages purchases of government bonds, which can be counted as reserves.
  • It lowers one-day deposit rates for banks and brings in quarterly deposits (again, 25% per year!) where you can only put funds if withdrawn from the population under contracts of 3 months or more.

There are actions but the problem is not resolved, why?

Do stronger and faster steps threaten the stability of the banking system? Isn’t the NBU against banks that made super profits during the war years and received international honors for this?

Before it turns into “populism” we still have a bad situation that can be resolved and the “take and divide (of course in favor of the government’s budget)” headlines do not stand out, for example some kind of additional tax on the excess profits of the banks (don’t steal the idea).

There is an excellent opportunity for useful political PR – to file a deputy appeal to the NBU with requests to clarify the situation and the plan of action. And the NBU should clearly explain why during the war banks made record profits paid only by citizens, and why steps to fix this have been so slow.

Source

Source: Focus

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